I got a call from a client this morning asking if a mortgage we showed on a title search was open-ended. It is an important question. When we do a search, we report what we find. If the mortgage is open-ended we write "Open-Ended Mortgage." If it is not, we simply write "Mortgage." But, this reminded me of an email I received a few months ago. It seems that an abstractor did not indicate whether the mortgage was open-ended or not. As it turned out, it was open-ended and there was a claim on the title policy because of the discrepancy. The question in the email I received was simply "who is responsible for the claim?"

I received a call this morning from a client asking for our E&O declarations page. She explained to me that they are renewing their coverage and their insurer was requiring proof of our coverage. But it is really more than that - Ohio law requires "subcontractors to maintain an errors and omissions policy." This brings up an interesting question, however. Because, like many states, Ohio does not require abstractors to be licensed, who is in charge of enforcing this law and how can it be done?

In July 2009, I posted a blog about insurance fraud perpetrated by an abstractor in Kentucky - Cut & Paste Insurance Fraud. The justice system may not be swift, but finally, just this month, I have received word that this abstractor was charged with insurance fraud and convicted after a guilty plea.

Errors and omissions insurance for abstractors is very expensive, at least in relation to the depressed fees that are prevalent in the industry. Unfortunately, working without it is not an option for many abstractors. Some states require abstractors to carry E&O insurance, and even if the state does not, many clients do. Beyond that, it is rather foolish to incur the amount of potential liability that we do without some form of protection.

Recently, I was informed of an abstractor that crossed the line from foolish to criminal. As ill-advised as it is to operate without E&O insurance, it is far worse to represent to clients that you have coverage when you don't. Especially when in the process you forge a declarations page and pass it off as your own. Issuing false certificates or proofs of insurance is insurance fraud.

The dynamics of the title industry have changed dramatically over the past decade or so, but errors and omissions insurance has not. This has caused many abstractors' insurance premiums to rise, often due to claims which are beyond their control. When you consider the types of claims that are classified as "searching error," it is easy to see how independent abstractors could do everything right and still see an increase in their annual premiums for E&O insurance.

Does anyone know the difference between a "searcher," an "abstractor," and an "examiner?" These terms are used so interchangeably today that you have to wonder if anyone can even make a distinction between them - well, I can. My definitions may be different than others, and some may not agree with me. But for what its worth, let me explain my take on it.

Searcher: Searchers were used in the equity market for property reports. Rarely was title insurance issued on the work product of a searcher. They can find a copy of the deed, get tax information and find any open mortgages and liens. Barring anything complicated, they may even be able to report a proper title vesting. Vendor management companies built large networks of unskilled searchers that could quickly churn out basic current owner searches.

I have known many "searchers" that I would never trust to search a title for title insurance purposes. They don't possess the depth of knowledge necessary to identify many potential problems that can be crucial when insuring title.

Abstractor: Abstractors were used to provide all of the information necessary for a title agent to review to make determinations of insurability. They report all of the same things a searcher would, but they also look deeper and understand more complex issues surrounding title. They were able to spot appurtenant easements, erroneous court proceedings, future interests, reversionary interests, problems affecting access, etc. Abstractors would report all of these things, and provide copies of those that the insurer should review before making a determination of insurability.

Abstractors know how to create a proper chain of title and search all of the various interests out to report a complete and accurate title vesting. They are able to show any missing interests that may need to be corrected prior to issuing title insurance.

Examiners: Examiners possess all of the skills of an abstractor, plus many of those of a title agent. They are familiar enough with not only the title but also the insurance side of the equation to be able to state the requirements for insuring the title. A good examiner can prepare a title search suitable to go straight to a typist to prepare a title commitment. The agent can then review the commitment and the examiners search notes for accuracy and sign off on it.

So why is this even important anymore if the industry has completely lost sight of the differences? Simply because we have too many searchers that consider them selves to be abstractors - or even examiners. They don't realize their own limitations and most of the time, neither do their clients. Clients expect to be able to pay abstractors and examiners the same as they have always paid their searchers, and they expect the same miraculous turn-around times as well. After all, a search is a search, right? ...WRONG.

A searcher should never be used for a title search that will be used to issue title insurance. There is much more to issuing a title policy than finding deeds and mortgages. Searchers simply do not have the expertise to recognize the complicated title issues that must be identified prior to insuring title. Give me a smart chimp and couple of free weekends and I could probably teach him to be a searcher... but he will never be able to be an abstractor or examiner.

What is the effect we have seen from losing sight of the difference between these categories?

Hosting Source of Title, I get tons of e-mail inquiring about many different subjects; E&O is one of the most frequent. I am often surprised how many abstractors do not really understand some of the basics of their E&O policy. E&O insurance is complicated and it is important to use an experienced agent who will guide you through your purchase of the policy and any claims scenario (but let's hope you never have a claim).

My agent is Nancy Walker with Title Program Administrators. [UPDATE: Nancy is now with American Insurance Professionals.] I would highly recommend her to anyone for their E&O policy.

The thing about E&O insurance that many do not understand is that it is a claims-made type of policy. What does that mean? Well, it means that in order to be covered a claim must be made during the policy period. The opposite would be an occurrence policy, which means that a claim is covered if the policy was in force when the loss-causing event occurred. In the E&O world, occurrence policies do not exist; they are all claims-made policies.

One of the most important dates on your policy is the Retroactive Date. That is when your coverage began, and any loss-causing events from that date, through your current policy period, will be covered. Each time you renew your policy, the retroactive date remains the earliest point at which you have had continuous coverage.

It is VERY important that you do not have a lapse in coverage or your retroactive date will start all over and any work you have done prior to that will no longer be covered.

I learned this the hard way. I had my local insurance agent handling my E&O insurance when I first obtained coverage in 1997. They weren't very knowledgeable on the subject. When my renewal premium tripled, I decided to shop around a bit. It took several weeks to get a few quotes back and by that time, my policy had lapsed and I was informed that I was no longer covered for the previous year. A good agent would have warned me about this hazard. My retroactive date is now 1999, and I am very cautious to make sure that my policy does not lapse and I retain that coverage.

So, what happens when you leave the business and no longer need E&O coverage? You must request tail-coverage. Tail-coverage will extend the reporting date for any claims for up to 5 years. As we all know, in the title business, claims may arise years after the work has been done. Without tail-coverage, you are taking a gamble that you will not have any claims on work you previously completed.

To sum it up: (1) Make sure you have a knowledgeable agent for your E&O policy; (2) Never let your policy lapse; and (3) When you leave the business, purchase tail-coverage.

How do you know if your abstractors are carrying the proper errors and omissions coverage? As was reported at the NALTEA conference in San Diego, some abstractors seem to be working the system and scamming insurers and their clients.

It works like this: an abstractor applies for E&O insurance and opts to finance the premium. They get their certificate that shows coverage and then they make no further payments, and the policy is cancelled. Even though the coverage no longer exists, the abstractor still has the certificate to fax to potential clients who require it.

So, again I ask, do your abstractors have E&O coverage? Short of making random calls to the insurer shown on the certificate, how do you really know?

Well, you can look at the retroactive coverage date. If they have maintained coverage for many years, it is less likely they would risk the prior coverage by letting the policy lapse.

But I would also suggest getting know your abstractors (if you don't already). Look for experienced, professional abstractors with a reputation for honesty and integrity. Your abstractor should be someone you can trust and upon whom you can depend.

The focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?